1. The Income Statement and Statement of Cash Flows4
Chapter 4: The Income Statement and Statement of Cash Flows

2. Learning Objectives LO1
Explain the difference between net income and comprehensive income and how we report components of the difference.
LO1
Our first learning objective in Chapter 4 is to explain the difference between net income and comprehensive income and how we report components of the difference.

3. Comprehensive Income
An expanded version of income that includes four types of gains and losses that traditionally have not been included in income statements.
Comprehensive income is the total change in equity for a reporting period other than from transactions with owners. Comprehensive income includes net income as well as other gains and losses that change shareholders’ equity but are not included in traditional net income.

4. Other Comprehensive Income
Statement of Financial Accounting Standards No. 130
Comprehensive income includes traditional net income and changes in equity from nonowner transactions.
Changes in the market value of securities available for sale (described in Chapter 12).
Reporting a pension liability sometimes requires a reduction in shareholders’ equity (described in Chapter 17).
When a derivative is designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction (described in Chapter 14).
Gains or losses from changes in foreign currency exchange rates (discussed elsewhere in your accounting curriculum).
Companies must report both net income and comprehensive income and reconcile the difference between the two. The following items are part of comprehensive income:
Changes in the market value of securities available for sale (described in Chapter 12).
Reporting a pension liability sometimes requires a reduction in shareholders’ equity (described in Chapter 17).
When a derivative is designated as a cash flow hedge is adjusted to fair value and the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction (described in Chapter 14).
Gains or losses from changes in foreign currency exchange rates (discussed elsewhere in your accounting curriculum).

5. Accumulated Other Comprehensive Income
In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as an additional component of shareholders’ equity.
In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as an additional component of shareholders’ equity. In this example, Federal Express reports Accumulated Other Comprehensive Loss of $46 million and $30 million for years 2004 and 2003, respectively.

6. Learning Objectives LO2
Discuss the importance of income from continuing operations and describe its components.
LO2
Our second learning objective in Chapter 4 is to discuss the importance of income from continuing operations and describe its components.

7. Income from Continuing Operations
Revenues
Inflows of resources resulting from providing goods or services to customers.
Expenses
Outflows of resources incurred in generating revenues.
Gains and Losses
Increases or decreases in equity from peripheral or incidental transactions of an entity.
Income Tax Expense
Because of its importance and size, income tax expense is a separate item.
Income from continuing operations includes revenues, expenses, gains and losses that will probably continue in future periods.
Revenues are inflows of resources resulting from providing goods or services to customers.
Expenses are outflows of resources incurred in generating revenues.
Gains and losses are increases or decreases in equity from peripheral or incidental transactions of an entity.
Income tax expense is reported separately because of its importance and size.

8. Operating Income Versus Nonoperating Income
Includes revenues and expenses directly related to the principal revenue-generating activities of the company
Includes gains and losses and revenues and expenses related to peripheral or incidental activities of the company
A distinction is often made between operating and nonoperating income. Operating income includes revenues and expenses directly related to the principal revenue-generating activities of the company. Nonoperating income includes gains and losses and revenues and expenses related to peripheral or incidental activities of the company.

9. Income Statement (Single-Step){
Proper Heading {
Revenues & Gains
Expenses & Losses {
No specific standards dictate how income from continuing operations must be displayed, so companies have flexibility. However, there are two general approaches: the single-step format and the multiple-step format.
A single-step income statement format groups all revenues and gains together and all expenses and losses together. An advantage of the single-step format is its simplicity.

10. Income Statement (Multiple-Step){
Proper Heading {
Gross Profit
Operating Expenses { {
Non- operating Items
The multiple-step income statement format includes a number of intermediate subtotals before arriving at income from operations. However, notice that the net income is the same no matter which format is used.
A primary advantage of the multiple-step format is that, by separately classifying operating and nonoperating items, it provides information that might be useful in analyzing trends. Similarly, the classification of expenses by function also provides useful information.

11. Learning Objectives LO3
Describe earnings quality and how it is impacted by management practices to manipulate earnings.
LO3
Our third learning objective in Chapter 4 is to describe earnings quality and how it is impacted by management practices to manipulate earnings.

12. Earnings Quality
Earnings quality refers to the ability of reported earnings to predict a company’s future.
The relevance of any historical-based financial statement hinges on its predictive value.
Many believe that corporate earnings management practices reduce the quality of reported earnings. Earnings quality refers to the ability of reported earnings to predict a company’s future. The relevance of any historical-based financial statement hinges on its predictive value.

13. Manipulating Income and Income Smoothing
“Most managers prefer to report earnings that follow a smooth, regular, upward path.”1
Two ways to manipulate income:
Income shifting
Income statement classification
How do managers manipulate income? Two major methods are (1) income shifting and (2) income statement classification.
Income shifting is achieved by accelerating or delaying the recognition of revenues or expenses.
The most common income statement classification manipulation involves the inclusion of recurring operating expenses in “special charge” categories such as restructuring costs.
1 Bethany McLean, “Hocus-Pocus: How IBM Grew 27% a Year,” Fortune, June 26, 2000, p. 168.

14. Learning Objectives LO4
Discuss the components of operating and nonoperating income and their relationship to earnings quality.
LO4
Our fourth learning objective is to discuss the components of operating and nonoperating income and their relationship to earnings quality.

15. Operating Income and Earnings Quality
Should all items of revenue and expense included in operating income be considered indicative of a company’s permanent earnings?
No, not necessarily.
Operating expenses may include the following unusual items that may or may not continue in the future:
Restructuring costs
Goodwill impairment
Long-lived asset impairment
In-process research and development
Part I
Should all items of revenue and expense included in operating income be considered indicative of a company’s permanent earnings?
Operating expenses may include the following unusual items that may or may not continue in the future:
Restructuring costs
Goodwill impairment
Long-lived asset impairment
In-process research and development
Part II
So, should all items of revenue and expense included in operating income be considered indicative of a company’s permanent earnings? No, not necessarily.

16. Operating Income and Earnings Quality
Restructuring Costs
Costs associated with shutdown or relocation of facilities or downsizing of operations are recognized in the period incurred.
Goodwill Impairment and Long-lived Asset Impairment
Involves asset impairment losses or charges (discussed further in Chapters 10 & 11).
Part I
Restructuring costs associated with shutdown or relocation of facilities or downsizing of operations are recognized in the period incurred. Statement of Financial Accounting Standards Number 146, “Accounting for Costs Associated with Exit or Disposal Activities,” requires that restructuring costs be recognized only in the period incurred. Fair value is the objective for the initial measurement of a liability associated with restructuring costs.
Part II
Goodwill Impairment and Long-lived Asset Impairment involves asset impairment losses or charges (discussed further in Chapters 10 & 11).
Part III
In-process Research and Development expense results from certain business combinations and is addressed in Chapter 10.
In-process Research and Development
Results from certain business combinations (discussed further in Chapter 10).

17. Nonoperating Income and Earnings Quality
Gains and losses from the sale of operational assets and investments often can significantly inflate or deflate current earnings.
How should those gains be interpreted in terms of their relationship to future earnings? Are they transitory or permanent?
Example As the stock market boom reached its height late in the year 2000, many companies recorded large gains from sale of investments that had appreciated significantly in value.
Most of the components of earnings in an income statement relate directly to the ordinary, continuing operations of the company. Some, though, such as interest and gains and losses are only tangentially related to normal operations. These we refer to as nonoperating items. Some nonoperating items have generated considerable discussion with respect to earnings quality, notably gains and losses generated either from the sale of operational assets or from the sale of investments.

18. Pro Forma Earnings
Companies often voluntarily provide a pro forma earnings number when they announce annual or quarterly earnings. Pro forma earnings are management’s assessment of permanent earnings.
The Sarbanes-Oxley Act Section 401 requires a reconciliation between pro forma earnings and earnings determined according to GAAP.
Companies often voluntarily provide a pro forma earnings number when they announce annual or quarterly earnings. Pro forma earnings are management’s assessment of permanent earnings.
The Sarbanes-Oxley Act Section 401 requires a reconciliation between pro forma earnings and earnings determined according to generally accepted accounting principles.

19. Separately Reported Items
Reported separately, net of taxes:
Discontinued operations
Extraordinary items
A third item, the cumulative effect of a change in accounting principle, was eliminated from separate reporting by a new accounting standard in 2005.
Generally accepted accounting principles require that certain transactions be reported separately in the income statement, below income from continuing operations. There are two types of events that, if material, require separate reporting and disclosure: (1) discontinued operations and (2) extraordinary items. In fact, these are the only two events that are allowed to be reported below continuing operations. The presentation order is also dictated as shown on the slide. The objective is to separately report all the income effects of each of these items.
Until recently, there was a third item to report below continuing operations. However, the cumulative effect of a change in accounting principle, was eliminated from separate reporting by a new accounting standard in 2005.

20. Intraperiod Income Tax Allocation
Income Tax Expense must be associated with each component of income that causes it.
Show Income Tax Expense related to Income from Continuing Operations.
Report effects of Discontinued Operations and Extraordinary Items NET OF RELATED INCOME TAXES.
Intraperiod tax allocation associates (or allocates) income tax expense (or income tax benefits if there is a loss) with each major component of income that causes it. As a result, the two items reported separately below income from continuing operations are presented net of the related income tax effect.

21. Learning Objectives LO5
Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
LO5
Our fifth learning objective is to define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.

22. Discontinued Operations
A discontinued operation is the sale or disposal of a component of an entity.
A component comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.
A component could include:
Reportable segments
Operating segments
Reporting units
Subsidiaries
Asset groups
A discontinued operation is the sale or disposal of a component of an entity.
Statement of Financial Accounting Standards Number 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” considers an operation to be a component of an entity if its cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.
A component could include:
Reportable segments
Operating segments
Reporting units
Subsidiaries
Asset groups

23. Discontinued Operations
Report results of operations separately if two conditions are met:
The operations and cash flows of the component have been (or will be) eliminated from the ongoing operations.
The entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.
By definition, the income or loss stream from an identifiable discontinued operation no longer will continue. As a result, the net-of-tax income effects of a discontinued operation are reported separately in the income statement, below income from continuing operations, if two conditions are met: (1) The operations and cash flows of the component have been (or will be) eliminated from the ongoing operations and (2) The entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.

24. Discontinued Operations
Reporting for Components Sold
Operating income or loss of the component from the beginning of the reporting period to the disposal date.
Gain or loss on the disposal of the component.
Reporting for Components Held For Sale
Operating income or loss of the component from the beginning of the reporting period to the end of the reporting period.
An “impairment loss” if the carrying value of the assets of the component is more than the fair value minus cost to sell.
Part I
When a component has been sold, the reported income effects of a discontinued operation will include two elements: (1) Operating income or loss of the component from the beginning of the reporting period to the disposal date and (2) Gain or loss on the disposal of the component.
Part II
When the component is considered held for sale, the reported income effects of a discontinued operation will include two elements: (1) Operating income or loss of the component from the beginning of the reporting period to the end of the reporting period and (2) An “impairment loss” if the carrying value of the assets of the component is more than the fair value minus cost to sell.

25. Discontinued Operations Example
During the year, Apex Co. sold an unprofitable component of the company. The component had a net loss from operations during the period of $150,000 and its assets sold at a loss of $100,000. Apex reported income from continuing operations of $128,387. All items are taxed at 30%.
How will this appear in the income statement?
During the year, Apex Co. sold an unprofitable component of the company. The component had a net loss from operations during the period of $150,000 and its assets sold at a loss of $100,000. Apex reported income from continuing operations of $128,387. All items are taxed at 30%.
How will this appear in the income statement?

26. Discontinued Operations Example
Computation of Loss from Discontinued Operations (Net of Tax Effect):
First, let’s compute the loss from discontinued operations. The net loss from the component being discontinued is $105,000. The net loss on the disposal of assets from the discontinued component is $70,000. Each of these is net of the related tax benefit.

27. Discontinued Operations Example
Income Statement Presentation:
On the income statement, the discontinued operation would be placed just below Income from Continuing Operations. Each item is reported net of the tax effect, which in this case is a tax benefit because each item is a loss. A disclosure note would provide additional details about the discontinued component, including the identity of the component, the major classes of assets and liabilities of the component, the reason for the discontinuance, and the expected manner of disposition.

28. Learning Objectives LO6
Define extraordinary items and describe the appropriate income statement presentation for these transactions.
LO6
Our sixth learning objective is to define extraordinary items and describe the appropriate income statement presentation for these transactions.

29. Extraordinary Items Material events or transactions Unusual in nature
Infrequent in occurrence
Reported net of related taxes
Extraordinary items are material events and transactions that are both unusual in nature AND infrequent in occurrence. These criteria must be considered in light of the environment in which the entity operates. There obviously is a considerable degree of subjectivity involved in the determination. Extraordinary items are reported net of related tax effects.

30. Extraordinary Items Example
During the year, Apex Co. experienced a loss of $75,000 due to an earthquake at one of its manufacturing plants in Nashville. This was considered an extraordinary item. The company reported income before extraordinary item of $128,387. All gains and losses are subject to a 30% tax rate.
How would this item appear in the income statement?
During the year, Apex Co. experienced a loss of $75,000 due to an earthquake at one of its manufacturing plants in Nashville. This was considered an extraordinary item. The company reported income before extraordinary item of $128,387. All gains and losses are subject to a 30% tax rate.
How would this item appear on the income statement?

31. Extraordinary Items Example
Computation of Loss from Extraordinary Item (Net of Tax Effect):
Income Statement Presentation:
Part I
First, let’s compute the loss from the extraordinary item. The pretax loss was $75,000. There will be a 30 percent tax benefit related to loss in the amount of $22,500. As a result, the net loss for the extraordinary item is $52,500.
Part II
Assuming no discontinued operations, the extraordinary item will appear net of tax just below Income before extraordinary item.

32. Unusual or Infrequent Items
Items that are material and are either unusual or infrequent—but not both—are included as a separate item in continuing operations.
Items that are material and are either unusual OR infrequent—but not both—are included as a separate item in continuing operations.

33. Accounting Changes
Accounting changes fall into one of three categories: (1) a change in an accounting principle, (2) a change in an accounting estimate, or (3) a change in reporting entity.
Let’s look at each of these in more detail.

34. Learning Objectives LO7
Describe the measurement and reporting requirements for a change in accounting principle.
LO7
Our seventh learning objective is to describe the measurement and reporting requirements for a change in accounting principle.

35. Change in Accounting Principle
Occurs when changing from one GAAP method to another GAAP method
For example, a change from LIFO to FIFO
Voluntary changes in accounting principles are accounted for retrospectively by revising prior years’ financial statements.
Changes in depreciation, amortization, or depletion methods are accounted for the same way as a change in accounting estimate.
A change in accounting principle refers to a change from one acceptable accounting method to another. There are many situations in which there are alternative treatments for similar transactions. A common example is the choice between last-in, first-out and first-in, first-out for the measurement of inventory.
Voluntary changes in accounting principles are accounted for retrospectively by revising prior years’ financial statements.
Please note that changes in depreciation, amortization, or depletion methods are accounted for the same way as a change in accounting estimate, which we will discuss next.

36. Learning Objectives LO8
Explain the accounting treatments of changes in estimates and correction of errors.
LO8
Our eighth learning objective in Chapter 4 is to explain the accounting treatments of changes in estimates and correction of errors.

37. Change in Accounting Estimate
Revision of a previous accounting estimate
Use new estimate in current and future periods
Estimates are a necessary aspect of accounting. A few of the more common accounting estimates are the amount of future bad debts on existing accounts receivable, the useful life and residual value of a depreciable asset, and future warranty expense.
Because estimates require the prediction of future events, it’s not unusual for them to turn out to be wrong. When an estimate is modified as new information comes to light, accounting for the change in estimate is quite straightforward. A change in accounting estimate is reflected in the financial statements of the current and future periods.
As was just mentioned in the pervious section, a change in depreciation, amortization, or depletion method is considered a change in estimate resulting from a change in principle. For that reason, we account for such a change prospectively, similar to the way we account for other changes in estimate. One difference is that most changes in estimate do not require a company to justify the change. However, this change in estimate is a result of changing an accounting principle and therefore requires a clear justification as to why the new method is preferable.
Includes treatment for changes in depreciation, amortization, and depletion methods

38. Change in Accounting Estimate Example
On January 1, 2003, we purchased equipment costing $30,000, with a useful life of 10 years and no salvage value. During 2006, we determine that the remaining useful is 5 years (8-year total life). We use straight-line depreciation.
Compute the revised depreciation expense for 2006.
On January 1, 2003, we purchased equipment costing $30,000, with a useful life of 10 years and no salvage value. During 2006, we determine that the remaining useful is 5 years (8-year total life). We use straight-line depreciation.
Compute the revised depreciation expense for 2006.

39. Change in Accounting Estimate Example
Part I
From the asset cost of $30,000, we need to subtract three years of depreciation at $3,000 per year. This gives us $21,000 of the undepreciated cost at the beginning of 2006, which is the year of the change in depreciation method. The $21,000 is divided by the remaining useful life of 5 years to arrive at an annual depreciation charge of $4,200.
Take a minute and record the journal entry for the depreciation expense for 2006 and subsequent years.
Part II
The journal entry for 2006 and the subsequent 4 years would be a debit to Depreciation Expense and a credit to Accumulated Depreciation for $4,200.
Record depreciation expense of $4,200 for
2006 and subsequent years.

40. Change in Reporting Entity
If two entities combine, a single set of consolidated financial statements is generally required.
If two entities combine, a single set of consolidated financial statements is generally required. The change in reporting entity involves the preparation of financial statements for an accounting entity other than the entity that existed in the previous period.

41. Change in Reporting Entity
A change in reporting entity is reported by restating all previous periods’ financial statements presented for comparative purposes as if the new reporting entity existed in those periods.
A change in reporting entity requires that financial statements of prior periods be retrospectively restated. This accounting change will be discussed in more detail in another part of your accounting curriculum.

42. Prior Period Adjustments
Corrections of errors from a previous period
Appear in the Statement of Retained Earnings as an adjustment to beginning retained earnings
Must show the adjustment net of income taxes
Errors occur when transactions are either recorded incorrectly or not recorded at all. A prior period adjustment refers to an addition to or reduction in the beginning Retained Earnings balance in a statement of shareholders’ equity. When it’s discovered that the ending balance of Retained Earnings in the period prior to the discovery of an error was incorrect as a result of that error, the balance is corrected. However, simply reporting a corrected amount might cause misunderstanding for someone familiar with the previously reported amount. Explicitly reporting a prior period adjustment on the statement of shareholders’ equity avoids this confusion. Prior period adjustments are reported net of tax effects.

43. Prior Period Adjustments Example
While reviewing the depreciation entries for , the controller found that in 2006 depreciation expense was incorrectly debited for $150,000 when in fact it should have been debited $125,000. (Ignore income taxes.)
Prepare the necessary journal entry in 2007 to correct this prior period error.
While reviewing the depreciation entries for , the controller found that in 2006 depreciation expense was incorrectly debited for $150,000 when in fact it should have been debited $125,000. All items are taxed at 30%.
Prepare the necessary journal entry in 2007 to correct this prior period error.

44. Prior Period Adjustments Example
The correcting entry is a debit to Accumulated Depreciation and a credit to Retained Earnings for $25,000. This entry reduces the Accumulated Depreciation account and increases the Retained Earnings account to correct for the overstatement in depreciation recorded in the previous year.

45. Learning Objectives LO9
Define earnings per share (EPS) and explain required disclosures of EPS for certain income statement components.
LO9
Our ninth learning objective is to define earnings per share (EPS) and explain required disclosures of EPS for certain income statement components.

46. Earnings Per Share Disclosure
One of the most widely used ratios is earnings per share (EPS), which shows the amount of income earned by a company expressed on a per share basis.
Basic EPS
Net income less preferred dividends
Weighted-average number of common shares outstanding for the period
Diluted EPS
Reflects the potential dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised.
Part I
One of the most widely used ratios is earnings per share, which shows the amount of income earned by a company expressed on a per share basis. Companies report both basic and diluted earnings per share.
Part II
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding.
Part III
Diluted earnings per share reflects the potential for dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised

47. Earnings Per Share Disclosure
Report EPS data separately for:
Income from Continuing Operations
Separately Reported Items
Discontinued Operations
Extraordinary Items
Net Income
Companies must disclose per share amounts for (1) income before any separately reported items, (2) each separately reported item, and (3) net income.

48. Describe the purpose of the statement of cash flows.
Learning Objectives
Describe the purpose of the statement of cash flows.
LO10
Our tenth learning objective is to describe the purpose of the statement of cash flows.

49. The Statement of Cash Flows
Provides relevant information about a company’s cash receipts and cash disbursements.
Helps investors and creditors to assess
future net cash flows
liquidity
long-term solvency.
Required for each income statement period presented.
The purpose of the statement of cash flows is to provide information about the cash receipts and cash disbursements of an enterprise that occurred during a period. The statement of cash flows helps investors and creditors assess future net cash flows, liquidity, and long-term solvency. A statement of cash flows is required for each income statement period presented.

50. Learning Objectives LO11
Identify and describe the various classifications of cash flows presented in a statement of cash flows.
LO11
Our eleventh learning objective in Chapter 4 is to identify and describe the various classifications of cash flows presented in a statement of cash flows.

51. Cash Flows from Operating Activities
Inflows from:
Sales to customers.
Interest and dividends received. +
Cash Flows from Operating Activities
Outflows to:
Purchase of inventory.
Salaries, wages, and other operating expenses.
Interest on debt.
Income taxes. _
Operating activities are inflows and outflows of cash related to the transactions entering into the determination of net operating income. A few examples of cash inflows and outflows from operating activities are listed on this slide. The difference between the inflows and the outflows is called net cash flows from operating activities. This is equivalent to net income if the income statement had been prepared on a cash basis rather than an accrual basis.

52. Direct and Indirect Methods of Reporting
Two Formats for Reporting Operating Activities
Reports the cash effects of each operating activity
Direct Method
Starts with accrual net income and converts to cash basis
Indirect Method
Two generally accepted formats can be used to report operating activities, the direct method and the indirect method.
By the direct method, the cash effect of each operating activity is reported directly in the statement of cash flows. By the indirect method, cash flow from operating activities is derived indirectly by starting with reported net income and adding or subtracting items to convert that amount to a cash basis.

53. Direct and Indirect Methods
Using the example of Arlington Lawn Care in the textbook, this slide illustrates the differences in the reporting formats for the direct method and the indirect method. Take a minute and look over these two formats. We will revisit the statement of cash flows in more detail in Chapter 21.

54. Cash Flows from Investing Activities
Inflows from:
Sale of long-term assets used in the business.
Sale of investment securities (stocks and bonds).
Collection of nontrade receivables. +
Cash Flows from Investing Activities _
Outflows to:
Purchase of long-term assets used in the business.
Purchase of investment securities (stocks and bonds).
Loans to other entities.
Investing activities involve the acquisition and sale of (1) long-term assets used in the business and (2) nonoperating investment assets. A few examples of cash inflows and outflows from operating activities are listed on this slide.

55. Cash Flows from Financing Activities
Inflows from:
Sale of shares to owners.
Borrowing from creditors through notes, loans, mortgages, and bonds. +
Cash Flows from Financing Activities
Outflows to:
Owners in the form of dividends or other distributions.
Owners for the reacquisition of shares previously sold.
Creditors as repayment of the principal amounts of debt. _
Financing activities involve cash inflows and outflows from transactions with creditors and owners. A few examples of cash inflows and outflows from operating activities are listed on this slide.

56. Noncash Investing and Financing Activities
Significant investing and financing transactions not involving cash also are reported.
Acquisition of equipment (an investing activity) by issuing a long-term note payable (a financing activity).
Significant investing and financing transactions not involving cash also are reported. For example, a significant investing and financing activity would be acquisition of equipment (an investing activity) by issuing a long-term note payable (a financing activity).

57. End of Chapter 4
End of Chapter 4